Copper, nickel and zinc up but seen vulnerable

Copper, zinc and nickel bounced back on Wednesday after losing ground since the start of the year, but the market is vulnerable, analysts said.

“We are seeing a recovery in nickel and zinc…the two that had been hit the hardest by the selling over the last few days,” analyst Kevin Norrish at Barclays Capital said.

“It is sensible to be cautious this week, the re-weighting and hedge selling will last until Monday of next week so we wouldn’t rule out further volatility,” he said.

This week the Dow Jones AIG is rebalancing its index, with the fund selling off some of the stronger-performing commodities of 2006. [ID:nL02923885]

London Metal Exchange copper was at $5,750 a tonne in the first open outcry trading session, up 2.2 percent from $5,625 at the close on Tuesday.

Zinc rose by 4.8 percent in early trade to hit $3,700 and was later indicated at $3,615/3,620 versus $3,520.

Nickel was at $31,450, up 4.1 percent or $1,225.

“The trend points lower so after this spark I believe some people will take home some profits at the close,” an LME floor dealer said.

At Tuesday’s close zinc had shed over 17 percent compared with the start of 2007, while copper and nickel were down by some 11 percent.

Norrish said: “We think the market is over-emphasising the importance of the re-weighting… once this is out of the way we expect a significant recovery.”

He was referring in particular to zinc and nickel, which he saw well supported by fundamental supply-demand factors.

Reflecting the tight nickel market, the premium for cash metal above the three-month price was at $1,300/1,350, having doubled since the start of January.

CHINESE BUYING

Many producers and traders expect copper prices to go higher by mid-February as Chinese buyers were expected to return to the market after heavy de-stocking in 2006.

“The Chinese have never really left this market so it might not have too much of an effect on prices,” the LME trader said.

Chinese demand for copper was unlikely to rise in the first quarter of 2007 as prices were considered high despite a plunge in the past month, analysts and industry sources said.

The price had dropped 35.5 percent from a peak of $8,800 in May last year but it is still up about 24 percent from the same period a year earlier. [ID:nHKG216703]

Copper stocks in LME-monitored warehouses stand at around 193,800 tonnes, or just under four days of world consumption, so the market is vulnerable to supply disruption.

Chilean state-owned miner Codelco said it was working to reduce the threat of rockslides at its 570,000 tonne-per-year Chuquicamata mine. [ID:nN09204702]

ALUMINIUM HIGHER

Three months aluminium was higher at $2,670, up $15.

The premium for cash metal above the three-month price was $67/77, the highest since 2004 and up from $20 on January 2.

“The large and growing anomaly in the nearby aluminium market suggests a major fund operation is under way,” economist John Kemp at Sempra Metals said.

He said one player held a large long position equivalent to more than 40 percent of the open interest in prompt January 17 or more than 714,000 tonnes, well in excess of the entire LME stock of around 698,000 tonnes.

“Should aluminium hold above the important trend line of $2,690, the price could go higher,” another floor trader said.

Tin was at $10,500, up from its last quote on Tuesday at $10,095/10,100.

Investors were watching developments in Indonesia, accounting for one third of the world’s tin production, where some smelters were awaiting a decision whether they could restart production. [ID:nJAK175024]